The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Tuesday, April 30, 2013

In his Guardian column, Aditya Chakrabortty examines the lessons to be learned from trusting political solutions masquerading as economic laws.

Dodgy research pushed by publicity-happy academics. False claims burnished into golden truths by irresponsible newspapers, apparently trying their hardest to manufacture a panic. Finally, the repercussions: bad decisions and, years later, huge worries about the harm posed to the public....

there was Carmen Reinhart and Ken Rogoff, two Harvard economists of great renown – but hardly box-office. ... Reinhart and Rogoff are guilty of no such breaches and their book on banking crises, This Time Is Different, will be considered a classic. ...

At the root of both sagas lies research, heavily contested then and now discredited, but given excessive credibility by outsiders in politics or the press – and used to push distinct agendas. ... Combined, we could call these lessons: how to flog a terrible idea.

Lesson 1: Have a suspicious public

For a terrible idea to take flight, the public must be in a receptive mood. ... The arguments over austerity followed on the great bust of 2007-8 – and hadn't then-prime minister Gordon Brown promised to abolish boom and bust?

In both cases, the press had been gulled by the official expertise. Do you remember those spreads in the Daily Mail about the coming chaos at RBS? No, I don't either.

Lesson 2: Bad ideas sound like common sense

The press had trusted establishment scientists and the economic technocrats; by the time MMR and the banking bust came along there was a market for policies that sounded easy to understand. So David Cameron really could get away likening the British economy to a household that had maxed out its credit card. It was nonsense, of course, but it was easy to understand nonsense. Unlike Bloomsbury-style Keynesianism, which was much more sensible amid a slump but was treated as far-out science to do with money supplies and fiscal multipliers. ...

Lesson 3: Bad ideas need strong supporters

That goes much more so for austerity, where the government here and the European troika used available research to push the cause of cuts and lay-offs. The Reinhart-Rogoff paper was published two years after Osborne had adopted austerity as his policy; academia provided justification, but they didn't change minds. And austerity has been fully cloaked in the language of morality: of debt being a bad thing, of southern Europeans being feckless.

The final caveat is: pure science lays much more emphasis on reproducing tests to see if the results bear up; macroeconomists can't run big experiments on entire countries to see which policies work, meaning that fights in the dismal science are necessarily more ideological (however disguised) than methodological.

Still, whether MMR or austerity, the bottom line in both is that plausible science can make bad decisions seem sensible. When the science no longer seems implausible, the game is up. Wakefield was rumbled; slowly but surely the same is happening to the austerity-mongers.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.